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The Fortnightly 100: Which Utility Ranks the Highest?

Fortnightly Magazine - September 1 1998

necessary to move the company to an optimal position on the efficient production frontier. As written earlier, the production frontier, or "best" practice, is based on the observed performance of other utilities. Therefore, optimal performance in terms of allocation of inputs and resources is also measured in relative terms. Targets and goals set in this manner are, therefore, realistic and obtainable. In this article we present the target values results aggregated across all the utilities used in the study. We show, on average, how the inefficient utilities have "misallocated" their resources with respect to the various inputs.

Just the Facts

Data were obtained from POWERdat (c)1998 Version 2.01, a Resource Data International Inc. database. Original data sources included the Federal Energy Regulatory Commission Form 1 and the U.S. Securities and Exchange Commission 10-K and 10-Q reports for holding companies and utility operations. The data set included 140 holding companies from 1990 to 1996.

Output was defined as total physical production in megawatt-hours produced and sold to all sectors (Schedule 14). Purchased power was removed from total MWh sales. Input variables consisted of labor cost, O&M expenses (excluding depreciation), pensions and benefits, total outlays for all fuels (Schedule 14), and capital (book value of total electric plant, including production, transmission and distribution). All data were converted to 1996 dollars using the producer price index.

Table 1 lists the top 100 utilities in terms of achieved efficiency in 1996. Nineteen utilities were classified as efficient (efficiency score = 1). The inefficient utilities received a score between 0 and 1 indicating the proportionate amount of inputs they should be using. That is, an efficiency score of 0.8 would indicate that the utility is underutilizing its input resources by about 20 percent. Table 1 also lists the DEA-selected peers identified by "Holding Company Code." The efficient utilities will not have a peer since there are no other utilities that can produce as much output using less input. For the inefficient utilities, we provided the peers to which they were compared; the companies that produced proportionally the same output using less input. The peer utilities are selected based on the same mix of inputs. It is understood that the DEA-selected peers may differ with respect to production conditions such as fuel mix, geography or customer base. Identifying peers based on these factors would require a case-by-case analysis of all the utilities in the study.

The list of top performers includes a wide mix of utilities in terms of size (from North Central Power to Southern Co.) and geographic location. Table 1 shows the specific conditions of scale economies under which we believe the utility is operating (i.e., constant, decreasing, or variable returns to scale - CRS, DRS or VRS, respectively).

Further ranking of the 19 efficient utilities is possible through DEA. The analysis creates a ranking of the DMUs on the efficient frontier based on the number of instances that they have been designated in DEA as peers. From an analytical point of view, this increases the confidence in the assessment concerning the operational efficiencies of these